The US Federal Reserve has moved to ease the current stock market crisis by cutting the rate it lends money to banks to 5.75% from 6.25%.
The 50 basis point cut will make it simpler for banks to borrow money from each other, while generally boosting the amount of funds in the sector.
"These changes are designed to provide depositories with greater assurance about the cost and availability funding," a Fed statement said.
The bank rate is different to the federal funds rate, which stays at 5.25%.
Williams de Broë economist Jim Wood Smith says the rate drop and the accompanying statement reads like a terminal disease diagnosis.
“We can take this one of two ways, either a major bank is in big trouble or else this is the (Fed chairman, Ben) Bernanke put option in its full glory.
“The market has gone for the latter, i.e. don't worry about all our stupid lending 'cos Uncle Ben will bail us out.”
Smith says not to get sucked into this rally.
“The rise in equities and collapse of the yen is highly predictable but may not last long,” he says.
“I suspect that sober reflection over the weekend will focus on the likely downsides of this move.”
RLAM economist Ian Kernohan says the economic growth risks have increased substantially and it may lead to a possible 50 basis point fed funds cut.
“Our US growth forecast was already more bearish than the Fed and I had expected rates to be cut this year, however, the risks to our US growth forecast are still on the downside and this will have a knock on effect in UK & Europe,” he says.
“We continue to expect cuts in UK rates next year and now expect a lower peak in European rates.”
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